When weighing the pros and cons of debt consolidation vs debt settlement, one of the main points of comparison is the fees charged by the companies offering these services. And although the cost of these programs should certainly not be the deciding factor for you when you are deciding on a debt relief program, it is important to at least understand what you will be paying for the different services.
Notice how I said what the companies "earn" in the sub-title above as opposed to what you will pay for their service. The reason for this is because debt consolidation companies earn their money from two different sources, you and your creditors.
What You Will Pay...
When you enter a debt consolidation program (or Debt Management Plan "DMP" as they are commonly called) you will usually have to pay a set-up fee, followed by a monthly fee to remain in the program. The set-up fee is typically around $50, while the monthly fee can range from $30 to $90 per month. Based on this, let's figure out what you might pay over the course of a debt management plan.
First of all, most DMP's are set-up to be completed within a 60 month time frame. So, if we were to assume a $50 set-up fee, plus $40 per month for 60 months, you would end up paying a total of $2,450 over the course of the program.
What The Debt Consolidation Company Will Earn...
Let's say that you have $20,000 in credit card debt when you enter the debt consolidation program. Although the amount of your debts does not factor into what you will pay for the service, it will factor into what the company will earn from your creditors. You see, your credit card company(s) will actually pay the debt management company you are working with (yes, even the non-profit consolidation companies) a percentage of the debt that you pay back while in their program. This percentage is usually in the 6% to 8% range. So if the DMP earns 7% on every dollar you pay back, after the program is completed and you have paid off your $16,000 in credit card debts, they will have earned an additional sum of $1,120 above and beyond the $2,450 that you paid in fees.
Therefore, the total amount that this company will earn from you if you complete the program is $3,570.
A common misconception when comparing debt consolidation vs debt settlement companies is that the companies offering to settle debts cost consumers a great deal more.
Not true. let's have a look
Unlike debt consolidation companies, debt settlement companies do not make any money from your creditors. Every penny that they earn comes from you the client. And although this may not seem like a good thing on the surface, at least you know that the company you have hired is working for you and not your creditors.
Now, when it comes to the fees charged by most settlement firms, they are typically charged based on a percentage of your outstanding debt. And the percentage used is 15% in most cases. So, assuming again that your outstanding debts total $16,000, the fee you would pay to settle your debts would amount to $2,400.
Now that we have some "hard" numbers let's compare them...
You pay: $2,450
Your creditors pay: $1,120
Total earned by the company: $3,570
You pay: $2,400
Your creditors pay: $0
Total earned by the company: $2,400
So who "wins" the battle of the fees when it we compare debt consolidation vs debt settlement?. Well, based on our example (and I realize that the numbers will change as the amount of debt changes) not only will you, the consumer pay less when entering a settlement program, the company running the program earns considerably less than a comparable debt consolidation company.
As I mentioned above, when choosing between debt relief options, you should never base your decision solely on the cost of the program. Case in point. Even though I have shown that in some instances a settlement program is cheaper than a consolidation program, for many people debt settlement simply does not make sense as an option given their financial situation. In order to end up choosing the best debt program, you must first understand your options and then choose the path that works best given your situation. Never base your choice strictly on cost.